Shenzhen to First Pilot Personal Bankruptcy in China

The Secretariat has recently contributed an article to LexisNexis PSL blog on the personal bankruptcy system that is to be piloted in Shenzhen, China. 

The article has been published by LexisNexis here. We are delighted to share the full content below. 

As the personal bankruptcy system, when finalised and in effect, will refer to many of the provisions on corporate insolvency, it will be helpful to learn more about China's corporate restructuring and insolvency regime by reading the China report in Corporate Restructuring and Insolvency in Asia available as an e-book here or in print here

 

Shenzhen to First Pilot Personal Bankruptcy in China

On June 2, Shenzhen Municipality published the draft of China's first ever personal bankruptcy regulations for public consultation. The Personal Bankruptcy Regulations of the Shenzhen Special Economic Zone (Draft for Comments) has a total of 157 articles across 13 chapters, and public consultation ended on June 18.

 

No safe haven for deadbeats

 

To preempt the possibility where debtors from all over China come to Shenzhen to evade debts once the regime is in place, the regulations require debtors to have made social contribution in the municipality for three consecutive years, among other conditions, before they can avail themselves of the protection. Further, the threshold for creditor-initiated personal bankruptcy filings is set at half a million RMB in debts that have fall due (individually or collectively) to prevent abuse by creditors with smaller claims.

 

A bankruptcy application filed for improper purposes such as "transferring assets, maliciously evading debts or damaging others' reputation" will not be accepted. Nor will those filed by parties who have "undermined the bankruptcy procedure" by means such as making false representations or providing false evidence. Further, the regulations have a list of circumstances under which debts are not allowed to be discharged and activities for which liabilities will not be exempted, all in an effort to prevent the regulations from being taken advantage of to maliciously evade debts or commit bankruptcy fraud.

 

Three-year probation period

 

Once a personal bankruptcy application is accepted, a debtor will need to serve a three-year probation period before debts are fully discharged. During this period, the debtor must report income, expenditure and assets to the bankruptcy department and the administrator on an annual basis, and will be subject to restrictions on spending, such as those on purchasing real estate and cars, renovating homes, travelling by luxurious means of transportation and renting high-end office premises for work. Violating these restrictions will result in the extension of the probation period.

 

Further, the debtor will be disqualified from holding directorship of listed companies, non-listed public companies and financial institutions. Bankruptcy declaration is a must before he/she can borrow RMB 1,000 or more.

 

Reorganization

 

The regulations give debtors who file for personal bankruptcy an option to apply for reorganization, in the same way available to corporate debtors under the Enterprise Bankruptcy Law. A debtor must submit a reorganization plan if he/she wishes to do so. The reorganization plan is subject to court sanction, after being approved by more than 50% in number of creditors present in each class and more than 75% in value represented by those creditors. Further, a reorganization plan is subject to a three-year timeline, with the interval between each repayment not exceeding three months.

 

Miscellaneous

 

Similar to corporate debtors, settlement by reaching an agreement is available under the draft personal bankruptcy regulations. The regulations also list the qualifications and duties of administrators and provide for a summary procedure where only one creditors' meeting is required.

 

As China's technology hub, Shenzhen is home to millions of small and individual businesses and start-ups that have been battered by the financial fallout of the coronavirus pandemic. It is hoped that the regulations, once passed, will be of assistance to those struggling but honest businesses as collective debts will then not be transferred without limitation to individuals and their families.

 

 

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